Explaining Retirement Plan Valuation In Divorces
At Nelson Kirkman, we know that addressing retirement plans and their division in a divorce is exceedingly difficult. Our team of family law attorneys has decades of combined experience practicing family law for our Orange County clients. On this page, you can read some answers we have provided about retirement assets so you have a better understanding.
Are contributions to retirement plans considered community property?
Yes, retirement plans are a type of compensation, and compensation during the marriage is community property. As part of a divorce, the plan will undergo valuation and a determination of what percentage is community property and separate property will be made based on if it was earned during the marriage. Following valuation, it will be divided between the parties.
How many types of retirement plans are there?
Retirement plans fall into two general categories: defined benefit plans such as a pension and defined contribution plans such as a 401(k).
Are retirement plan contributions made during the marriage considered community property?
Retirement plans fall into two general categories: defined benefit plans such as a pension, and defined contribution plans such as a 401(k).
What is a qualified domestic relations order (QDRO)?
A qualified domestic relations order (QDRO) is designed to enable the distribution of the nonemployee’s share of a retirement plan without suffering from income tax consequences. Since the contributions to many retirement plans are pretax, the QDRO ensures that this tax status is appropriately handled as part of the settlement between the parties of a California divorce.
What factors does the court consider when characterizing and valuing retirement plans?
Many factors are considered when characterizing and valuing retirement plans as part of asset division proceedings. These include:
- Years of employment before and after the date of marriage
- Type of retirement plan
- Contributions made during the marriage
- Increase in value during the marriage
- Performance of plan investments
- Age of the employed party
- Earliest possible retirement date
- Survivorship options
What are the features of a defined benefit plan?
Defined benefit plans provide a set benefit, begin paying that benefit at a specific age, and provide the benefit for a specific length of time. For example, a pension plan may pay $5,000 per month beginning at an employee’s 60th birthday and continuing to their death. In a divorce, a defined benefit plan is valued by an actuary to determine the present value of the benefit plan. Defined benefit plans that aren’t based on military service are split between community and separate property based on the “time rule,” which measures the difference in time worked to earn the plan between the marriage and before marriage (and after separation). Military pensions are split between community and separate property based on the “frozen benefit” rule, in which the community’s interest in the plan is frozen on the date of the divorce order.
What are the features of a defined contribution plan?
A defined contribution plan allows individuals to make a certain dollar amount contribution to the plan, often on a pretax basis, annually. The specific plan defines what level of contributions can be made each year. Common examples of defined contribution plans include 401(k), IRA, SEP IRA, and profit-sharing plans. Money deposited into a defined contribution plan after marriage and before separation is community property, as it is a form of compensation. Gains on the investments in the plan take on the characteristic of the underlying assets, so assets with a community interest generate community profits and losses.